What is net working capital or net working capital?
Net working capital, also known as net working capital, is a company's wallet. A healthy working capital is important to meet short-term payment obligations. This means that there should be sufficient working capital to, for example, maintain stock levels, pay employees and pay invoices to suppliers. A definition of working capital is:.
Working capital is the difference between current assets (inventories, debtors, cash) on a company's balance sheet and current liabilities (accounts payable and other current liabilities).
Why is improving your working capital so important?
Although your business may be in good shape on paper, if cash is not available for short-term expenses, it may even lead to bankruptcy. This is because working capital is money that gives you nothing. It is not in the bank, so you do not receive interest on it, nor can you invest it for growth. Working capital therefore 'costs' money. In short, it is cash flow that keeps a business running in the short term. The trick is to strike a balance between optimising this cash flow and improving working capital. A bank will therefore always check working capital before giving a company a loan. It also checks a lot of other things, but working capital, or net working capital, is certainly one of the most important!
How do you improve working capital?
There are several ways to positively influence your working capital. By analysing the payment behaviour of new customers, your organisation can protect itself from customers who pay late. You can also make agreements with your customers to reduce payment terms. On the other hand, you can try to pay your suppliers later. Use the entire payment period, and don't pay invoices earlier than necessary. Finally, matching inventory with sales is also beneficial for the working capital position. Less inventory means less cash tied up in the warehouse.
This is how you can calculate net working capital
The formula to calculate your company's net working capital requires three factors: current assets, cash and cash equivalents and current liabilities. Current assets include accounts receivable, inventories and other receivables. Cash and cash equivalents is a collective term for the total amount of money a company owns, both in its bank account and in its cash. Current liabilities include short-term debts and short-term borrowed capital. You add current assets to cash and cash equivalents, then subtract current liabilities. The result of this sum is the company's net working capital.
Calculating your working capital: short-term formula
If you want to calculate short-term working capital, the formula is as follows:
Working capital = current assets - current liabilities
You calculate working capital by reducing current assets by current liabilities.
Calculating your working capital: long-term formula
To calculate long-term working capital, use the following formula:
Working capital = equity + provisions + long-term debt - fixed assets
You calculate working capital by reducing equity, provisions and long-term debt by fixed assets.
Wondering what Xolv can do to optimise your working capital? We would be happy to advise you!
